Pricing method

pricing methods, perceived value pricing, competition based pricing, total cost based pricing or floor pricing, mark up pricing, target return pricing.

1. A STEP OF PROCESS OF SETTING THE PRICE Presented by- Apurv kumar maurya MONIRBA(ALLAHABAD) SELECTING A PRICING METHOD

2. Price Price is not just a number on a tag . It comes in many forms . Rent ,tuition fees ,fares wages and commissions are all the price you pay for some good or service A firm must set a price for the first time when it develops a new product When it introduces its regular product into a new distribution channel or geographical area

3. Steps in setting the price Selecting the pricing objective Determining demand Estimating costs Analyzing competitors costs ,prices and offers Selecting a pricing method Selecting the final price

4. Category of pricing methods

5. Mark-Up Pricing What is mark-up ? Mark up refers to the value that a player adds to the cost price of a product. Mark up is the profit for the player . Selling Price =Cost Price+ Mark up

6. Mark-Up Pricing The mark-up pricing method, calculates all the costs of purchasing or producing the product and then adds a desired mark-up to it.

7. Formula of Mark-Up Price Unit Cost/(1-desired return on sales) Where: Unit Cost = VC + ( FC/Unit Sales ) VC = Variable Cost FC = Fixed Cost

8. Fixed, Variable &Total Cost Total cost = Fixed cost + variable cost

9. Fixed Cost &Variable Cost Fixed Cost Time Related Incurred whether the units are produced or not. As the units produced increases, fixed cost per unit decreases and vice versa Rent, Salary, Insurance, Tax etc. Variable Cost Volume Relate Incurred only when the units are produced. Variable cost remains same, per unit Material Consumed, Wages, Commission on Sales, Packing Expenses, etc

10. Illustration Suppose a unit cost of a product ’A’ is Rs. 80 and the firm has desired return on sales of 20%. Markup price =80 / ( 1 - 0.2 ) = Rs.100 Cost based pricing method Cost is easy to determine as compared to demand

11. Mark-up Pricing 12 18 60 00 60 72 90 150 P R I C E

12. Target Return Pricing Formula based pricing method . The price is set for a product to return a desired profit on investment . Manufacturer assumes that a particular quantity of the product will be sold. Used by Market leaders or Monopolist.

13. Target Return Price Unit Cost + (Desired Return × Invested Capital) Unit Sales

14. Target Return Pricing Invested capital = $1000000 Unit Cost = $16 Desired Return = 20% Unit Sale = 50000 Total Fixed cost = $300000 Variable cost = $10 per unit Target-Return Price = 16 + (0.2×1000000) 50000 = $20 per unit

15. Target Return Pricing

16. Target Return Pricing Break –Even Volume = Total fixed cost Price-VC (per unit) 300000 20-10 = 30000 units Contribution margin = Price-VC (per unit)

17. Target Return Pricing

18. Perceived Value Pricing

19. Perceived Value Pricing Perceived value is made up of host of inputs [ 1 Buyer’s image of the product performance 2 The warranty quality . 3 Customer support ,etc.] and softer attributes . [ 1 Supplier’s reputation 2 Trustworthiness 3 Esteem ,etc ] Firms use marketing program to communicate and enhance perceived value in buyer’s mind

20. Perceived Value Pricing

21. Perceived Value Pricing CAR - A CAR - B CAR - C Initial price 200000 250000 50000 Maintenance Cost Over 10 years 150000 100000 50000 Fuel Cost Over 10 years 300000 275000 25000 Perceived value Of CAR -B 200000( A) +50000 ( Savings in Maintenance ) + 25000 (Saving in fuel expenses) = Rs. 275000

22. Auction –Type Pricing An  auction  is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder.  A  bid  is an offer to pay a particular amount of money for something that is being sold. There are three major type of auctions and their separate pricing procedures .

23. English Auctions An English auction is an open-outcry ascending  auction. Also known as ascending bids . Have one seller and many buyers . Fully transparent, as the identity of all bidders is disclosed to each other during the auction. 

24. English Auctions   It proceeds as follows. The auctioneer opens the auction by announcing a Suggested Opening Bid, a starting price. Then, the auctioneer accepts increasingly higher bids from the floor. The highest bidder at any given moment is considered to have the standing bid. If no competing bidder challenges the standing bid within a given time frame, the standing bid becomes the winner, and the item is sold to the highest bidder at a price equal to his or her bid.

25. Dutch Auctions It is also known as Descending bids . There are two types 1 ) One seller and many buyers : An auctioneer announces a high price for a product and then slowly decreases the price until a bidder accepts . 2) One buyer and many sellers : The buyer announces something he or she wants to buy, and potential sellers compete to offer the lowest price .

26. Dutch Auctions Example: Let’s assume Company XYZ WANT to sell 10 million shares using a Dutch auction. To participate in a Dutch auction, an investor typically opens an account with Company XYZ’s underwriter, obtains a prospectus and access coder. During biding ,investors indicate how many shares they are willing to buy and the price they are willing to pay.

27. Dutch Auctions Company XYZ’s Dutch Auction Price Bids Share ( In Million ) Cumulative Share $ 40 $ 36 2 1 1 $ 35 4 4 5 $ 34 10 5 10 $ 33 3 3 13

28. Sealed-Bid Auctions Also known as  blind auction. Bidders simultaneously submit sealed bids. No bidder knows the bid of any other participant. The highest bidder pays the price they submitted. Each bidder is characterized by his/her monetary valuation of the item for sale.

29. Sealed-Bid Auctions Each bidder is given just one chance to bid. In sealed-bid auction, it is advantageous for a bidder to gather information about the competing bids before deciding on his own bid. Therefore, the "privacy" issue is essential in this auction format. 

30. Going Rate Pricing  The product is priced as per the rates prevailing in the market . the company sets a price of its products and services in line with the competitor’s prices This type of pricing is mostly followed in  Oligopolistic industries where they deal in homogenous goods, and in which less variation is seen from one producer to another.

31. Going Rate Pricing The prices set by the market leaders are followed by all the organizations in the industry. With a going-rate pricing method, companies feel secure as they are sure to get the customers because of the same rates prevailing in the industry.

32. EDLP EDLP means Every Day Low pricing . Every day low price (EDLP) is the pricing method used by retail stores that provides low prices to the customers every single day without any special pricing discount, sale, comparison shopping etc. EDLP helps the retail stores to reduce their demand fluctuation that would occur due to promotions on some days.

33. EDLP Stores like Wal-Mart and Spencers have used the EDLP strategy to a very good extent for their success.